Wildfire Considered One Occurrence Despite Damaging Numerous Properties

Christina Phillips | Property Insurance Coverage Law Blog | November 29, 2018

A recent decision by the Supreme Court of Wisconsin1 might predict how other courts would analyze coverage under commercial general liability insurance policies for wildfires. In May 2013, a fire broke out on forest land owned by Lyme St. Croix Forest Company. The fire burned nearly 7,500 acres over the course of three days and damaged real and personal property owned by various individuals and businesses.

The fire was alleged to have begun within a piece of logging equipment owned by Ray Duerr Logging, LLC (“Duerr”). At the time of the fire, Duerr was insured by Secura under a commercial general liability policy with a $2 million aggregate limitation. The policy also contained a logging endorsement, the per-occurrence limit was reduced to $500,000 for property damage due to fire arising from logging or lumbering operations. Secura believed that the $500,000 policy limit applied, rather than the $2 million aggregate limit and filed a declaratory judgment action.

The Supreme Court of Wisconsin was presented with determining whether the fire was a single occurrence for purposes of the CGL policy, or whether there was a new occurrence each time the fire crossed a property line. The court began by looking at the policy language, which defined “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” The court then looked to the “cause theory” which provides “where a single uninterrupted cause results in all of the injuries and damage, there is but one ‘accident’ or ‘occurrence.’ ” If the cause and results are so simultaneous or closely linked in time and space as to be considered by the average person as one event, then only a single event has taken place.

In concluding that the fire was a single occurrence, the court noted that the fire burned continuously for three uninterrupted days in a discrete area caused by a single precipitating event. The court believed that the average person would consider this one event regardless of how many properties lines the fire crossed. In that regard, the Supreme Court of Wisconsin believed that the number of properties damaged by the fire was irrelevant – whether one person, or multiple persons owned the 7,500 acres did not determine the number of occurrences.

Additionally, the Wisconsin Supreme Court disagreed with the court of appeals determination that there was an occurrence each time the fire – fueled and expanded by the consumption of new materials – spread to a new piece of real property and caused damage. The Wisconsin Supreme Court held that such a conclusion would result in an unfathomably large number of occurrences, an interpretation which would cause an unreasonable result under the policy. As such, the Wisconsin Supreme Court concluded there was a single occurrence, subject to the $500,000 policy limit.
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1 Secura Ins. v. Lyme St. Croix Forest Co., LLC, 918 N.W. 2d 885 (WI. Oct. 30, 2018).

“An” Versus “Any”: When One Word Makes a Profound Difference in an Insurance Contract

Jeff Collins | Jones, Skelton & Hochuli PLC |  November 14, 2018

A fundamental principle of insurance is that it provides a safety net for fortuitous events which may create liability against the insured. Equally fundamental is the principle that liability insurance policies do not insure foreseen, expected or intentional acts or omissions of an insured. With regard to a commercial general liability policy, these fundamentals are enshrined in the requirement of an “occurrence,” as used in the Insuring Agreement and defined by the policy, and in the exclusion for “expected or intended injury.” However, these principles are not always satisfied.

Unfortunately for insurers, there may be certain circumstances based upon specific policy wording in which there is coverage for an insured-employer for its vicarious liability arising out of the intentional and excluded conduct of its employees. This analysis, in Arizona and elsewhere, centers around a single word in the “expected or intended injury” exclusion. The standard exclusion states:

Expected Or Intended Injury

“Bodily injury” or “property damage” expected or intended from the standpoint of [the] [an] [any] insured. This exclusion does not apply to “bodily injury” resulting from use of reasonable force to protect persons or property.

The bracketed words [the] [an] [any] have been assigned significant importance in the case law, and are also at issue in cases examining other liability exclusions. Depending on which word is used in the exclusion, an employer-insured may be covered for the vicarious liability of an employee who acted with intent to cause “bodily injury.” This includes cases of clear intent to cause physical harm constituting assault, and this result is contrary to the fundamental insurance principle of protecting against only fortuitous risks.

The Arizona Court of Appeals addressed this issue in American Family Mutual Insurance Company v. White, 204 Ariz. 500, 65 P.3d 449 (App. 2003). In White, American Family issued a homeowners policy to its insureds, whose son was indicted on two counts of aggravated assault after assaulting the plaintiff.

In the civil litigation, the plaintiff alleged that the insureds were liable for negligent supervision of their son. American Family denied coverage for the claims based upon a “violation of law” exclusion, which excluded bodily injury “arising out of . . . violation of any criminal law for which any insured is convicted . . . .” (emphasis added). In White, the appellant argued that the severability clause mandates that an insurer determine the applicability of exclusionary clauses separately as to any insured asserting coverage. This clause states, in part, that the rights or duties assigned in the coverage apply “separately to each insured against whom a claim is made or ‘suit’ ‘is brought.” As such, the appellant claimed that the exclusion did not apply to the negligent supervision claim against the insureds because only their son was convicted of violating a criminal law.

The court held that the phrase “any insured” in an exclusionary clause means something more than the phrase “an insured.” For purposes of this analysis, “the” can be similarly treated as “an.” Specifically, the distinction is that [an] refers to one object, and [any] refers to one or more objects of certain type. Therefore, the court held that the phrase “any insured” in an exclusion bars coverage for any claim attributable to the excludable acts of any insured, even if the policy contains a severability clause. Had the phrase read “an insured,” the excludable conduct would had to have been attributable to each insured separately.

Arizona courts have not yet addressed this distinction in the context of the “expected or intended” exclusion in a vicarious liability situation. However, there is no indication that an Arizona appellate court would not apply the same rationale adopted in White to such an exclusion. This leads to the illogical conclusion that an insurer would have to prove that the employer-insured also acted intentionally to preclude coverage for a purely vicarious liability claim. Because the underlying merits of the vicarious liability claim do not rely upon proof of the employer’s mental state, that “intent” will never be at issue and there will always be coverage for the vicarious liability arising out of the non-fortuitous and intentional acts of an employee. Although the separate analysis of each insured’s state of mind may be logical in the context of other non-vicarious claims that require an analysis of the insured-employer’s separate actions (negligent hiring, supervision, retention or entrustment), it is not so in the context of a purely vicarious liability claim.

There is some indication from the White decision that common law may support application of the exclusion to exclude vicarious liability claims against the insured-employer. After conducting its policy-based analysis, the court held:

We also conclude that the negligent supervision claim against the Wildes is excluded because it derives from the claim against Travis, which is excluded. See Behrens v. Aetna Life & CAS., 153 Ariz. 301, 736 P.2d at 385 (1987) (finding that a claim for negligent entrustment or supervision could not exist apart from the excluded negligent operation of a boat).

White, 204 Ariz. at 508. (emphasis added). Based upon this language, the court left open the possibility of a similar challenge to cases involving vicarious liability claims arising out of excluded conduct. That would appear to be an uphill battle given that the primary holding of the court was based upon specific policy language (“any” versus “an”) and well-settled analysis in cases across the country. Also, the Behrens’ decision, cited in White, did not involve an analysis of the “any” versus “an/the” issue in conjunction with the severability clause.

Aside from the exclusion in addressing intentional acts, there is the potential coverage argument that the “bodily injury” was not caused by an “occurrence,” i.e. an accident. If the bodily injury was caused by the intentional acts of an employee, then it was not accidental. Therefore, it should be a logical extension that any claims arising out of that conduct, including vicarious claims, should not be covered as not qualifying for coverage under the Insuring Agreement. This analysis is independent of the applicability of the exclusion addressed above and was addressed by the United States District Court, District of Arizona, in National Fire Insurance Company of Hartford v. Lewis, 212 WL 6552596 (D. Ariz. 2012).

In that matter, National Fire issued a business owners’ liability insurance policy to a medical practice. The practice and individual physicians were sued based on allegations that a physician inappropriately viewed and touched patients under the guise of performing legitimate medical treatment, allegedly constituting assault and battery. Further, the practice and other physicians were allegedly vicariously liable for that tortious conduct. The court noted that none of the parties contended that the defendants intended or expected the tortfeasor doctor to do what he did. Thus, while the tortfeasor doctor may have intended his own actions, from the perspective of the other defendants, the actions were “undesigned, sudden and unexpected events” that met the definition of an accident. The court determined that “consequently, there has been an ‘occurrence’ under the terms of the business owner policies,” and the vicarious liability claim qualified for coverage under the Insuring Agreement.

National Fire is a District Court decision, and that portion of the court’s opinion is not premised upon any well-settled Arizona law interpreting whether an “occurrence” could be attributed to an insured-employer in a vicarious liability claim arising out of the intentional conduct of an employee. Thus, there is an argument that this issue remains unsettled in Arizona, and it should be examined by an Arizona state appellate court. Aside from being a co-conspirator, it is difficult to imagine a factual scenario in which an employer-insured intends for its employee to intentionally cause another harm so that the vicarious claim would be considered non-accidental and not covered.

The practical effect of White and National Fire is that coverage may be afforded under a liability policy for clearly non-accidental conduct. Although the “occurrence” analysis arises out of common law largely beyond an insurer’s control, an insurer can control this risk by changing one word in the “expected or intended injury” exclusion. Using “any” as opposed to “an” or “the” excludes all claims arising out of excluded conduct, and fulfills the insurance principle of protection only against fortuitous events.

Despite Modern Trend, Ohio Supreme Court Does Not Reconsider Prior Precedent – Finds Inadvertant Defective Work by Subcontractor can Never be a Fortuitous ‘Occurrence’

Clifford Shapiro | Barnes & Thornburg LLP | October 15, 2018

The Ohio Supreme Court ruled on Oct. 9, 2018, that property damage caused by a subcontractor’s faulty workmanship can never be an accidental “occurrence” within the meaning of the Commercial General Liability (CGL) insurance policy, and is therefore not covered. Ohio Northern University v. Charles Construction Services Inc., Case No. 2017-0514 (2018). In reaching this conclusion, Ohio’s highest court followed its own precedent instead of applying the reasoning used by the vast majority of courts that have reached the opposite conclusion in recent years.

Ohio Northern University (ONU) hired Charles Construction Services to oversee construction of an $8 million University Inn and Conference Center. Charles Construction obtained a general liability policy from Cincinnati Insurance Company. After the project was completed, the University discovered extensive water infiltration and other damage to the building. The University sued Charles Construction for breach of contract, and Charles Services filed third-party claims against several subcontractors. Cincinnati initially agreed to defend Charles Construction in the litigation under a reservation of its rights, and then obtained a trial court ruling finding that it had no duty to defend. The Appellate Court reversed, and the Ohio Supreme Court agreed to review the Appellate Court’s decision at Cincinnati’s request.

The Ohio Supreme Court reversed, finding that Cincinnati owed no duty to defend or to indemnify Charles Construction. The analysis in the decision is based entirely on the court’s 2012 decision in Westfield Ins. Co. v. Custom Agri Sys., Inc., 133 Ohio St.3d 476, 979 N.E.2d 269 (2012). In that case, the court held that “property damage caused by a contractor’s own faulty work” is not “fortuitous” and therefore is not an accidental “occurrence.”

The court viewed the issue in Charles Construction to be “nearly identical,” and therefore applied its reasoning in Custom Agri. Using that analysis, the court held that: “Property damage caused by a subcontractor’s faulty work is not an ‘occurrence’ under a CGL policy because it cannot be deemed fortuitous. Hence, the insurer is not required to defend the CGL policy holder against suit by the property owner or indemnify the insured against any damage caused by the insured’s subcontractor.”

The Ohio Supreme Court acknowledged that its decision is contrary to several recent decisions. Those decisions include the Tenth Circuit’s decision in Black & Veatch Corp. v. Aspen Insurance (UK) Ltd., 882 F.3d 952 (10th Cir. 2018) (predicting that the highest New York court would hold that resulting damage from faulty subcontractor work constitutes an “occurrence”), the New Jersey Supreme Court decision that changed New Jersey law in Cypress Point v. Adria Towers,2016 WL 4131662 (2016) (holding that the term “accident” in the CGL policy encompasses unintended and unexpected harm caused by negligent conduct, and that consequential harm caused by negligent work is an accidental “occurrence”), and the Iowa Supreme Court decision that changed Iowa law in National Surety Corp. v. Westlake Investments, 880 N.W.2d 724 (Iowa 2016) (discussing in detail the history and evolution of the CGL policy to change and clarify Iowa law by holding that “defective workmanship by an insured’s subcontractor may constitute an occurrence under the modern standard-form CGL policy containing a subcontractor exception to the ‘your work’ exclusion.”)

The decision issued by Ohio’s highest court does not reconsider the court’s reasoning in Custom Agri or address the legal analysis that is now used by most other courts that have carefully considered (and, in several cases, reconsidered) this issue in recent years. Instead, the Ohio Supreme Court applied its prior decision in Custom Agri without discussion of the important changes to the policy terms that most courts have concluded require a different conclusion. According to the court: “Regardless of any trend in the law, we must look to the plain and ordinary meaning of the language used in the CGL policy before us.” The court added: “When the language of a written contract is clear, we may look no further than the writing itself to find the intent of the parties.”

Contrary to the court’s explanation, its analysis in Custom Agri, and now Charles Construction, actually fails to apply the terms of the modern day CGL insurance policy. Instead, these decisions apply an outdated judicial gloss not found in the insurance policy itself to conclude that inadvertent faulty workmanship can never be “fortuitous” or “accidental.” This reasoning is rooted in analysis that was used by courts and commentators before the CGL policy terms were materially changed, including in 1986. Those changes modified the exclusions to clarify that the CGL policy provides coverage for certain kinds of property damage caused by inadvertent faulty workmanship. In other words, the coverage grant in the modern day CGL policy specifically anticipates that coverage can exist for property damage caused the accidental “occurrence” of faulty workmanship. The CGL policy exclusions then define and narrow the scope of the insurance coverage that is actually provided when property damage is caused by faulty workmanship. In particular, due to the “subcontractor exception” in the “your work” exclusion, the modern day CGL policy specifically anticipates and provides insurance coverage for a general contractor when property damage is caused by the faulty work of its subcontractors. This is especially true where (as in Charles Construction) the property damage arises after operations are complete and the damage is to something other than the subcontractor’s defective work itself.

The Ohio Supreme Court’s decision is contrary to the clear trend in the law on this issue, a trend that is based on more careful analysis of the current CGL policy terms. It is most unfortunate that the Ohio Supreme Court elected not to use the Charles Construction case as an opportunity to reconsider and to correct the faulty reasoning and analysis in the court’s 2012 Custom Agri decision. For more analysis of the important “occurrence” issue, please see the 50 state survey of case law discussing this issue that was prepared by the Barnes & Thornburg Construction Law Practice Group. It can be accessed here.

Underlying Assertion of Negligent Misrepresentation Is Not Necessarily an Occurrence

Nora Valenza-Frost | PropertyCasualtyFocus | September 14, 2018

Lumber

Courts sometimes struggle with the issue of whether property damage arising in the context of a contractual relationship, particularly in construction contracts, constitutes an “occurrence” under a standard commercial general liability (CGL) policy. Generally, but not always – and it varies from jurisdiction to jurisdiction – courts regard contractual breaches as non-accidental conduct, and/or apply the so-called “business risk” exclusions (such as the standard CGL “Your Work” exclusion), in finding no coverage. Lexington Ins. Co. v. Chicago Flameproof Wood Specialties Corp., No. 17-cv-3513 (N.D. Ill. Aug 10, 2018), a recent decision from a federal court in Illinois, is illustrative.

Lexington Insurance Company (“Lexington”) issued a CGL policy to Chicago Flameproof and Wood Specialties Corporation (“Chicago Flameproof”). The policy provided that Lexington would pay sums that Chicago Flameproof “becomes legally obligated to pay as damages because of bodily injury or property damage” that is “caused by an occurrence that takes place in the coverage territory” and that “occurs during the policy period.”

A framing contractor, required by contract to use fire-retardant-treated lumber meeting International Building Code (IBC) requirements, procured lumber from Chicago Flameproof to be used for the exterior walls of four buildings. The framing contractor contracted with Chicago Flameproof to buy D-Blaze lumber, but instead, was provided non-IBC-compliant lumber. As a result, the framing contractor was ultimately instructed to remove and replace the non-compliant lumber and sued Chicago Flameproof for negligently or fraudulently misrepresenting the type of lumber it was providing, resulting in damage to the exterior walls, wiring, and Tyvek insulation on the buildings, among other things (the “Underlying Actions”).

Chicago Flameproof sought coverage from Lexington, but Lexington challenged coverage and filed a declaratory judgment action, arguing that its duties to defend and indemnify were not triggered “because the claims against Chicago Flameproof do not involve property damage, were not the result of an occurrence, and were otherwise excluded by the policy’s business risk exclusions.” The parties moved for summary judgment, agreeing that no factual dispute existed and the only issue was the interpretation of the CGL policy, a question of law.

The court disagreed with Lexington’s argument that there was no “property damage” as the framing contractor sought to hold Chicago Flameproof “liable for physical injury to tangible property.” The court also disagreed with Lexington’s argument that the damage alleged was “nothing more than economic injuries stemming from the repair and replacement of the non-compliant lumber,” as there were “allegations of physical alterations to property other than the insured’s product” caused by the removal process which could fall within the definition of “property damage.”

However, the court acknowledged that, “for property damage to be covered by the CGL policy, it must be caused by an ‘occurrence.’” Illinois courts find an “occurrence” in the insurance context to mean:

An unforeseen occurrence, usually of an untoward or disastrous character or [a] … sudden, or unexpected event of an inflicting or unfortunate character…. However, even if the person performing the act did not intend or expect the result, if the result is the rational and probable consequence of the act, or, stated differently, the natural and ordinary consequence of the act, it is not an accident for liability insurance purposes.

Chicago Flameproof argued that the Underlying Actions satisfy the “occurrence” requirement “because they assert negligent misrepresentation and because Chicago Flameproof did not expect or intend the injuries to other building materials.” The court disagreed, and focused on the conduct alleged: Chicago Flameproof “failed to exercise reasonable care when it represented that it had D-Blaze lumber in stock and when it did not inform [the framing contractor] that its orders could be fulfilled.” Although couched in negligence terminology, the thrust of the complaints “is that Chicago Flameproof engaged in deliberate conduct – the shipping of the wrong lumber and the concealment of that fact – that caused the alleged property damage.”

The court reasoned that, even though Chicago Flameproof’s delivery of the lumber was allegedly intentional “does not necessarily mean that it expected or intended the collateral injuries to the exterior walls, wiring, and insulation…. Chicago Flameproof could have and should have reasonably anticipated that such injuries could result from supplying” the wrong lumber, which had to be torn out of the buildings. “These damages are the natural and ordinary consequence of knowingly supplying a non-compliant product and thus do not potentially fall within the CGL policy’s coverage.”

In concluding, the court stated that, although the Underlying Actions contain “one count for negligent misrepresentation, mere inclusion of a negligence theory does not – and cannot – by itself satisfy the occurrence requirement. Nowhere in the complaint are there allegations of an unforeseen or accidental event that produced property damage.”

This case is a helpful reminder that liability insurance cannot be used as a warranty for an insured’s failure to fulfill contractual undertakings, and that even if couched in a complaint as “negligent” conduct, when assessing an insurer’s duty to defend and indemnify under a CGL policy, careful consideration should be paid to the cause of the alleged damages when determining if there is an “occurrence.”

California Supreme Court Rights the “Occurrence” Ship: Unintended Harm Resulting from Intentional Conduct Triggers Coverage Under Liability Insurance Policy

Scott S. Thomas | Payne & Fears | June 6, 2018

SUMMARY

In a ruling that bodes well for policyholders, the California Supreme Court provides much-needed clarity on the question of when a so-called “intentional act” may give rise to insurance coverage under a liability insurance policy. In Liberty Surplus Insurance Corp. v. Ledesma & Meyer Construction Co., Case No. S23765 (Cal. June 4, 2018), the Court holds that an employer’s potential liability for negligent hiring, after its employee allegedly abused a 13-year old student, is the result of an “occurrence” and is thus covered under the employer’s liability insurance policy.

COURT OPINION

The court’s opinion dispels the misguided notion that an intentional act resulting in unintended harm is never an “occurrence” and can never trigger coverage. What matters, according to the Court, is that, from the insured’s point of view, the consequences of its conduct are “unexpected, unforeseen, or undesigned” – even if the conduct is intentional. And in a concurring opinion, Justice Liu rightfully questions the legitimacy of the notion that intentional conduct cannot trigger coverage, even when it produces an unintended result, unless, in the words of a 1989 appellate court decision, some “additional, unexpected, independent, and unforeseen happening occurs that produces the damage.” As Justice Liu explains, this intervening “happening” may be something as simple as the insured’s mistaken belief that he was acting in self-defense, or that the victim had consented to the insured’s conduct. This much-needed clarification restores vitality to the fundamental principle that injuries are “accidental” when they are “unexpected, unforeseen, or undesigned,” regardless of their cause.

KEY TAKEAWAYS

This ruling will apply in many contexts: For example, contractors who “intentionally” build things; competitors who “intentionally” disparage another’s product; employers who “intentionally” hire employees who do bad things. The Court’s decision restores the law’s fidelity to fundamental principles enunciated in the seminal California “occurrence” case: Gray v. Zurich, 65 Cal. 2d 263 (1966). And it ought to dampen insurers’ enthusiasm for denying claims on the spurious ground that the insured’s conduct – even though it resulted in bodily injury or property damage that the insured did not expect or intend to cause – was “intentional.”